Most-favored-nation clauses attract antitrust scrutiny

Common in contracts between sellers and buyers, the most typical most-favored-nation clauses (MFNs) provide that a seller will give a buyer the lowest price the seller offers. If it does offer a lower price to another buyer, the seller must offer the same price to the buyer that is party to the MFN agreement. MFNs can be beneficial to buyers, sellers and the market alike, providing discounted prices and comfort in fair pricing.

Sometimes, however, they raise antitrust concerns, and a few recent cases indicate that the government has renewed its focus on ferreting out those MFNs deemed to have anti-competitive effects.

In a pending civil antitrust action against Blue Cross Blue Shield of Michigan, an October 2010 complaint sought to enjoin the health insurer from using such clauses in its contracts with hospitals, arguing that its use of MFNs reduces competition and raises prices for health insurance in Michigan.

Allegedly anti-competitive MFN clauses also are an aspect of the government’s price-fixing claims surrounding the contracts between Apple Inc. and several publishers in regards to e-book pricing in Apple’s iBookstore. The ongoing civil case against Apple takes aim at an “unusual” MFN “designed to protect Apple from having to compete on price at all.”

The Department of Justice (DOJ) and the Federal Trade Commission (FTC) indicated at a Sept. 10 joint workshop on MFNs and antitrust policy that the agencies are committed to understanding the competitive effects of MFNs. They also signaled continuing scrutiny of the practice.

“[MFNs] have the potential to inflict significant harm to consumers and competitors,” Joseph Wayland, the then-acting head of the DOJ’s Antitrust Division, said at the workshop.

Competitive Effects

As panel members at the DOJ/FTC workshop outlined, MFN clauses have the potential to facilitate coordination and diminish competition: They can disincentivize sellers from offering discounts and buyers from negotiating for them. In addition, their effects on pricing and negotiations can raise barriers to market entry, particularly for smaller competitors or new entrants.

That was the crux of the DOJ’s antitrust action against Blue Cross Blue Shield of Michigan: “The MFNs have harmed competition by (1) reducing the ability of other health insurers to compete with Blue Cross, or actually excluding Blue Cross’ competitors in certain markets, and (2) raising prices paid by Blue Cross’ competitors and by self-insured employers,” the complaint read.

Panel members, however, emphasized MFNs’ pro-competitive and neutral effects. For instance, in situations in which prices fluctuate over time, MFNs can provide a proxy for the marketplace in long-term contracts. They also can break stalemates in negotiations brought on by uncertainty over fair pricing for first-in buyers.

“MFN clauses … often play a critical role in a negotiation of giving the paying party a sense of comfort that they are not being dealt with unfairly vis-à-vis other parties in terms of overpaying. … Given the ultimate goal of reaching a deal that supports the parties’ respective business initiatives, an MFN is essentially pro-competitive if it succeeds in breaking a negotiating paralysis,” T-Mobile USA’s Director of Legal Affairs Melissa Scanlan, who spoke at the workshop, explained in an email.

MFN Analysis

There is an absence of case law or guidelines that clarify black-and-white rules on MFNs, so currently the question is whether a specific MFN has an anti-competitive effect.

At the workshop, Andrew Gavil, director of the FTC’s Office of Policy Planning, suggested a structured rule-of-reason analysis for MFNs looking at whether an MFN has potential for significant anti-competitive effects given its context, whether and in what ways the anti-competitive effect is collusive or exclusionary, and whether there are efficiency justifications of the MFN. Such an analysis is highly fact-specific.

“It’s not clear when and under what circumstances MFNs would have such an adverse effect without a detailed look at the specific MFN at issue in light of the relevant market dynamics,” says Robert Leibenluft, a partner at Hogan Lovells.

There are some rules of thumb about when an MFN may be worrisome (see “Checklist of Concerns”). MFNs generally only cause concern in concentrated industries with big sellers or buyers and are unlikely to cause problems when entered into by companies with small market shares.

Owing to the potential for harmful effects given the nature of the health care industry, 19 states currently prohibit or restrict the use of MFNs in health care contracts. The DOJ has announced its intent to scrutinize MFNs such as the one at issue in the antitrust case against Blue Cross Blue Shield of Michigan—which the complaint says enjoys a considerable market share amongst the state’s commercial health insurers. In March, Wayland’s predecessor in the Antitrust Division, Sharis Pozen, said the government was coordinating with state attorneys general “to open investigations of various MFN clauses in a number of [health insurance] markets.”

Ask Why

Some panelists at the workshop emphasized that in light of antitrust scrutiny of MFNs, parties considering the defensibility of an MFN clause should first consider what benefits they and their customers will get from it.

“There might be some very good and pro-competitive reasons for the MFN, and it’s important as a counselor to understand what those reasons are and to see if [contracts are] well-designed to achieve what they are trying to accomplish,” Leibenluft says.

Although some at the workshop called for the DOJ and FTC to develop guidelines on MFNs, it remains unclear whether they plan to do so.

“Over time, the government may provide some broad guidance … but it may be difficult to create a bright-line test that would be useful in many ‘close call’ situations because the analysis is so fact-specific,” Leibenluft says.

Checklist of Concerns

Steven Salop, professor of economics and law at Georgetown University Law Center and senior consultant at Charles River Associates, put together the following list of attributes that can signal when most-favored-nation clauses might raise antitrust concerns. Salop presented the checklist at the Sept. 10 Department of Justice/Federal Trade Commission workshop.

More Worrisome

• Jointly adopted by horizontal agreement

• Provided by large sellers with market power

• Provided by most likely maverick

• Received by largest buyers

• Multiple MFNs with high market coverage

• Highly significant input

• Airtight MFN, with audit rights/penalties

• Retroactive MFN; larger penalties

• MFNs which require sellers to charge competitors a specified percentage more

• Only rationale is that largest buyer “deserves” lowest price

• Only rationale is “we did not care about the price, only that we did not pay more than others”

Less Worrisome

• Provided only by smaller sellers that lack market power

• Received only by smaller buyers

• Unconcentrated markets

• Input with close substitutes

• Part of long-term contract with locked-in assets

• Monopolist seller and noncompeting buyers

• Significant risks of opportunism and delay that would deter investment

• Input has uncertain value for innovative new product, with resulting hold-out problem